Capital Gain Tax and its Exemptions

Last Updated at: November 04, 2019
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Capital tax gains and its exemptions in India

When an individual sells an asset, the profit or gain obtained from such sale is known as a capital gain. For people who deal with bonds, investment and such like, it can be critical to know which section of Income Tax law exempts them from paying tax. The article expounds upon them.

Levy of tax is inevitable on any profits made. But knowing the taxation policies and the exemptions that come with it can make anyone a smart investor. Especially, when one sells stocks, bonds, precious metals, or property, the profit made comes under the category capital gains and knowing tax exemptions applicable can be beneficial.  We, here, have an article that details on the different types of capital gains and its exemptions.

If you need more pointers on government registrations, trademarks, patents or tax filing, browse a few services provided at Vakilsearch below

Capital Gains
When an asset is sold, the profit or gain obtained from such sale is known as capital gain. These gains are the amount obtained from the sale of assets which exceeds the purchase price. Thus the difference between the lowest buying value and highest selling value is calculated for obtaining the capital gain. Capital gain is also investment income which arises during the sale of real assets, tangible and intangible assets and properties. Whenever these listed items are sold, the person is attracted to pay the tax liability under capital gains. This capital gain is classified into short term capital gain and long term capital gain.
Short-term Capital Gains:
This tax is based on the ordinary income of the people. When the time between the purchase and sale of property/capital asset is less than 24 months then the amount resulted from such disposition is known as short term capital gain and the amount will be calculated with respect to the income tax slab rates. For assets such as shares listed in stock exchange, debentures, mutual funds, Government Securities the period is reduced to 12 months instead of 24 months. In case of unlisted shares and immovable property, the time period is 24 months. The tax rate for unlisted equity shares is based on tax slabs and for listed equity shares it is 15%. These tax rates are discussed under Sec 111A of Income Tax Act.
Long Term Capital Tax Gain:
When the period between the purchase and sale of property/ asset is more than 24 months, then the gains/ profit arrived from such sale is known as long term capital gain. Sec 112A was inserted in the IT Act via Finance Act. This section mentions that if the sale is done on listed property and the amount of long term capital gain exceeds rupees one lakh, then the amount excess shall be taxed @ 10% without indexation. This tax rate is charged only for financial assets. For unlisted property, charges are @ 20.8% with indexation.

File Your Taxes & Stay Stress-free

Exemptions
A taxpayer can claim exemptions under the following sections:

  1. Sec 54 of IT Act says that if the taxpayer is an individual or a member of Hindu Undivided Family, the capital gain is obtained as a result of transfer of a long term asset such as building or land or even residential house shall be exempted if the taxpayer purchases another property within a year or 2 years and if he constructs another residential house in India within 3 years after the transfer is made, then he will not be charged for capital gain tax. This exemption is not applicable to companies, firms or LLP.

2. Sec 54B of IT Act discusses the condition for availing exemptions by the individual or a HUF. This section is made available only for the sale of agricultural land. The agricultural land must be used for the agricultural purpose for at least 2 years before the date of transfer by the individual. If the taxpayer buys another land within 2 years from the transfer date, the exemption is applicable. He has no rights to reinvest in agricultural lands. If the taxpayer claims exemptions and if he transfers the new agricultural land within 3 years from the acquisition date, then the exemption will be withdrawn. It is applicable for both long and short term capital gains.

3. Sec 54EC of IT Act provides that if the taxpayer within 6 months from the sale date/ transfer date has invested the capital gain in long term specified bonds issued by NHAI and REC or by the central government for a period of minimum 3 years (5 years if it is issued on or after 1st April 2018) shall be exempted to maximum limit of Rs.50 Lakhs. If the taxpayer has converted the property into cash or advances as a loan within 3 years from the acquisition date, the capital gain exemption will be withdrawn.

4. Sec 54F of IT Act provides that the taxpayers are exempted for the capital gains for the transfer of any capital asset other than residential house and the net consideration has been re-invested in purchase of one residential house within a year before the transfer or within 2 years after the transfer, If the taxpayer possess more than one residential property, then he will be deemed from exemption. If he constructs an addition residential property within 3 years from the transfer date, then he will be exempted from capital gain tax.

 Thus the capital gain Tax helps in reducing the future tax rate and improves investment returns. This puts an end for double taxation.

To conclude, there are two capital gains- long term and short term. The prior is when the time between the purchase and sale of the asset is over 24 months, and the latter when it is less than 2 years. Section 54 and its clauses define which capital gains can come under tax exemption.

Frequently Asked Questions

Who has to file taxes in India

Individuals who has the gross total income exceeding Rs.2,50,000/- has to file for the tax in India.The limit is 3,00,000 for the senior citizens( more than 60 years) and 5,00,000 for super senior citizens( more than 80 years). Learn More about Income Tax filing

Who is eligible for ESI?

Any employees whose monthly salary is Rs.21,000 or less than in a month is eligible for the Employees State Insurance Corporation (ESIC) registration. More info on ESI registration

Is Fssai license mandatory?

The Food Standards and Safety Authority of India(FSSAI) refers to the supreme authority that are responsible for supervising and regulating the food safety. It is compulsory for all the Food Business Operators(FBOs) to obtain the food licenses. More information on FSSAI

Who gives ISO certification?

ISO certification is not granted by any organization buy a certification body or registrar. So, choose an accredited registrar for the certification. More on ISO Certification

What are the payments on which tax is deducted at source?

TDS is the abbreviation of tax deducted at source. Going by the Income Tax Act, a person or company making a payment should deduct tax at source if it exceeds a specific threshold limit. Details on TDS Return Filing

How to register for trademark online

Trademark Electronic Application System(TEAS) is an online filing service for the online trademark or you can also fill and submit through paper application. Details on Trademark Registration

What is the criteria for MSME?

In February 2018, the government has classified businesses with a turnover between Rs. 75 crores and Rs. 250 crores as MSME (Micro, Small and Medium Enterprise). Learn more about SSI/ MSME Registration

Capital Gain Tax and its Exemptions

5965

When an individual sells an asset, the profit or gain obtained from such sale is known as a capital gain. For people who deal with bonds, investment and such like, it can be critical to know which section of Income Tax law exempts them from paying tax. The article expounds upon them.

Levy of tax is inevitable on any profits made. But knowing the taxation policies and the exemptions that come with it can make anyone a smart investor. Especially, when one sells stocks, bonds, precious metals, or property, the profit made comes under the category capital gains and knowing tax exemptions applicable can be beneficial.  We, here, have an article that details on the different types of capital gains and its exemptions.

If you need more pointers on government registrations, trademarks, patents or tax filing, browse a few services provided at Vakilsearch below

Capital Gains
When an asset is sold, the profit or gain obtained from such sale is known as capital gain. These gains are the amount obtained from the sale of assets which exceeds the purchase price. Thus the difference between the lowest buying value and highest selling value is calculated for obtaining the capital gain. Capital gain is also investment income which arises during the sale of real assets, tangible and intangible assets and properties. Whenever these listed items are sold, the person is attracted to pay the tax liability under capital gains. This capital gain is classified into short term capital gain and long term capital gain.
Short-term Capital Gains:
This tax is based on the ordinary income of the people. When the time between the purchase and sale of property/capital asset is less than 24 months then the amount resulted from such disposition is known as short term capital gain and the amount will be calculated with respect to the income tax slab rates. For assets such as shares listed in stock exchange, debentures, mutual funds, Government Securities the period is reduced to 12 months instead of 24 months. In case of unlisted shares and immovable property, the time period is 24 months. The tax rate for unlisted equity shares is based on tax slabs and for listed equity shares it is 15%. These tax rates are discussed under Sec 111A of Income Tax Act.
Long Term Capital Tax Gain:
When the period between the purchase and sale of property/ asset is more than 24 months, then the gains/ profit arrived from such sale is known as long term capital gain. Sec 112A was inserted in the IT Act via Finance Act. This section mentions that if the sale is done on listed property and the amount of long term capital gain exceeds rupees one lakh, then the amount excess shall be taxed @ 10% without indexation. This tax rate is charged only for financial assets. For unlisted property, charges are @ 20.8% with indexation.

File Your Taxes & Stay Stress-free

Exemptions
A taxpayer can claim exemptions under the following sections:

  1. Sec 54 of IT Act says that if the taxpayer is an individual or a member of Hindu Undivided Family, the capital gain is obtained as a result of transfer of a long term asset such as building or land or even residential house shall be exempted if the taxpayer purchases another property within a year or 2 years and if he constructs another residential house in India within 3 years after the transfer is made, then he will not be charged for capital gain tax. This exemption is not applicable to companies, firms or LLP.

2. Sec 54B of IT Act discusses the condition for availing exemptions by the individual or a HUF. This section is made available only for the sale of agricultural land. The agricultural land must be used for the agricultural purpose for at least 2 years before the date of transfer by the individual. If the taxpayer buys another land within 2 years from the transfer date, the exemption is applicable. He has no rights to reinvest in agricultural lands. If the taxpayer claims exemptions and if he transfers the new agricultural land within 3 years from the acquisition date, then the exemption will be withdrawn. It is applicable for both long and short term capital gains.

3. Sec 54EC of IT Act provides that if the taxpayer within 6 months from the sale date/ transfer date has invested the capital gain in long term specified bonds issued by NHAI and REC or by the central government for a period of minimum 3 years (5 years if it is issued on or after 1st April 2018) shall be exempted to maximum limit of Rs.50 Lakhs. If the taxpayer has converted the property into cash or advances as a loan within 3 years from the acquisition date, the capital gain exemption will be withdrawn.

4. Sec 54F of IT Act provides that the taxpayers are exempted for the capital gains for the transfer of any capital asset other than residential house and the net consideration has been re-invested in purchase of one residential house within a year before the transfer or within 2 years after the transfer, If the taxpayer possess more than one residential property, then he will be deemed from exemption. If he constructs an addition residential property within 3 years from the transfer date, then he will be exempted from capital gain tax.

 Thus the capital gain Tax helps in reducing the future tax rate and improves investment returns. This puts an end for double taxation.

To conclude, there are two capital gains- long term and short term. The prior is when the time between the purchase and sale of the asset is over 24 months, and the latter when it is less than 2 years. Section 54 and its clauses define which capital gains can come under tax exemption.

Frequently Asked Questions

Who has to file taxes in India

Individuals who has the gross total income exceeding Rs.2,50,000/- has to file for the tax in India.The limit is 3,00,000 for the senior citizens( more than 60 years) and 5,00,000 for super senior citizens( more than 80 years). Learn More about Income Tax filing

Who is eligible for ESI?

Any employees whose monthly salary is Rs.21,000 or less than in a month is eligible for the Employees State Insurance Corporation (ESIC) registration. More info on ESI registration

Is Fssai license mandatory?

The Food Standards and Safety Authority of India(FSSAI) refers to the supreme authority that are responsible for supervising and regulating the food safety. It is compulsory for all the Food Business Operators(FBOs) to obtain the food licenses. More information on FSSAI

Who gives ISO certification?

ISO certification is not granted by any organization buy a certification body or registrar. So, choose an accredited registrar for the certification. More on ISO Certification

What are the payments on which tax is deducted at source?

TDS is the abbreviation of tax deducted at source. Going by the Income Tax Act, a person or company making a payment should deduct tax at source if it exceeds a specific threshold limit. Details on TDS Return Filing

How to register for trademark online

Trademark Electronic Application System(TEAS) is an online filing service for the online trademark or you can also fill and submit through paper application. Details on Trademark Registration

What is the criteria for MSME?

In February 2018, the government has classified businesses with a turnover between Rs. 75 crores and Rs. 250 crores as MSME (Micro, Small and Medium Enterprise). Learn more about SSI/ MSME Registration

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